Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
Hello, I know this has been mentioned many times on these forums, but I am still a bit confused, and was wondering if someone could help run numbers on a couple of scenarios.
Scenario #1- House is vacant, potential rent is $1250 and I could buy it for $52k and then it needs 12k to rehab.
Scenario #2- 4 plex , one unit occupied at $500 per month and the rest can be rented out at $500 per month so potential $1500 gross rents. Purchase price is $50k and 30k worth of work.
How would you calculate both formulas to these scenarios.
Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
14y
So Greg, the 50% and 2% rules are used for analysis.
Essentially, the 50% rule says over the long term, a property managed rental will average 50% expenses. This is inclusive of all expenses short of your debt servicing. Your property taxes, insurance, maintenance, vacancy, legal fees, repairs, advertising, etc etc etc.
The 2% rule is an evaluation tool. It steers you towards properties that generate a monthly rent of 2% of the purchase price. At a $500/unit rental point, the 2% rule is designed to generate $100/door which is a normal target for Landlords. Note as your rents move from $500, up or down, you may want to adjust that 2% rule.
So lets look at your deals. House 1 would be $53,250. 2% of that would be about $1,065. If your rents are accurate, looks like a solid deal. Lets look further. Lets assume you mortgage $48,000 (just over 75% LTV) @ 5% for 30 years, your payment would be $258/mo (mortgage + interest). So with rents of $1,250 and the 50% rule, you would have $625 for debt servicing and cash flow. With $215 for debt servicing, your projected monthly cash flow would be $367. That's very healthy.
Deal 2, I'm assuming you mean it would rent for $2,000 a month (4 units * $500/mo). At $80,000, you would be looking for $1,600 a month in rent. Again, looks pretty solid. Your mortgage payment ($60,000 @ 5% for 30 years) would be $322. With 50% towards expenses, your cash flow is projected at $678 a month, about $170/unit which is very solid.
So lets look at cash on cash. Assuming you get to 75% LTV on either property after repairs (and ignoring closing costs cause I'm lazy).
Both deals are good. A single family house will likely appreciate faster and be less overall management. The multifamily home will appreciate slower but generate better month to month cash flow and CoC returns.
Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
14y
Thank you. So basically it's the purchase price + rehab costs x .02 = rent and as long as the potential rent is higher than that then it's a deal to look at?